How to Explain a Drop in Share Prices

Smart investors trade with market trends.

An explanation for a drop in share prices is something that investors don't get very often. Shares drop for a variety of reasons, but the most common reason is that shares are trending down. Smart investors trade with the trends in the market and render the periodic reversals in the market meaningless. Explaining a drop in share prices doesn't necessarily mean that investors lose money; investors who purchase options can make money when the market goes down. Drops in share prices occur for many reasons, and most are common and rational explanations.

Things You'll Need

• Access to market research data

Instructions

1. Check the stock price of the company you wish to review. Examine the drop in price and what period it follows. Record the drop and the associated time period.

2. Examine the price-to-earnings ratio of the stock and recent news and announcements that affected the company. If there is a recent announcement about the company that coincides with the price drop, then that is the key element in the price drop. If this isn't true, go to Step 3.

3. Search for government news related to the industry. Federal and state regulations can sometimes affect every company in an industry. Compare government news to the recent drop in stock price. If these announcements coincide with the price drop, this is the key to the drop in price share. If this isn't true, go to Step 4.

4. Review analyst data on the company. Did recent analyst data suggest the company's stock, bonds or credit rating should be downgraded? If this is true, this explains the recent price drop. If this isn't true, go to Step 5.

5. Research recent stock technical information. Recent technical indicators should show a negative outlook, and that causes the stock price to drop. Some commonly used technical indicators include moving averages, Bollinger Bands, CCI and the stochastics indicator. Any combination of these factors will cause investors to move away from the stock and sell.

Tips & Warnings

• News and recent press releases may require an in-depth search. Be patient while reviewing worldwide news on a company.

• Price drops based on technical information may require an in-depth search of technical indicators. Usually this may require a day or more to examine all technical indicators.

References

• Moneycrashers.com: Stock Valuation Models